FIN 320F Foundations of Finance Section 1 Practice Exam 1. How do Treasury bills (T-bills) differ from Treasury notes and bonds? a. T-bills bear a coupon rate of interest; Treasury notes and bonds are sold at a discount b. T-bills trade in money markets; Treasury notes and bonds trade in capital markets c. T-bills have no default risk; Treasury notes and bonds have default risk d. All of the above e. Only a. and b. above 2. Student A has never owned a credit card or taken out a loan. Student B actively uses two credit cards, but pays them off in full each month. Student C has one credit card that is charged up to the credit limit; she pays the minimum amount due each month. All other things held equal, who has the highest credit rating? a. Student A b. Student B c. Student C 3. Assume the Federal Reserve (the Fed) wishes to increase market interest rates. What actions could the Fed take to cause interest rate to rise? a. Increase the federal funds rate b. Decrease the reserve requirement c. Buy Treasury instruments on the open market d. Sell Treasury instruments on the open market e. Both a. and d. above Use the following information to answer questions 4 through 6. Allein Corp. issued $10 million in 5-year, 5.5% debenture bonds to build a dental health facility. The bonds’ indenture agreement includes a sinking fund provision. 4. In what way did the sinking fund provision impact the Default Risk Premium (DRP)? a. Because the sinking fund lowers the perceived risk of default, it decreased the DRP b. Because the sinking fund lowers the perceived risk of default, it increased the DRP c. Because the sinking fund raises the perceived risk of default, it decreased the DRP d. Because the sinking fund raises the perceived risk of default, it increased the DRP 5. If, instead of issuing debentures, Allein had secured the bond issue by pledging the dental health center as collateral, how would the coupon rate on the bonds have been impacted? a. Securing the bonds with collateral would have lowered the coupon rate b. Securing the bonds with collateral would have raised the coupon rate c. Securing the bonds with collateral would have had no impact on the coupon rate d. Securing the bonds with collateral could have raised or lowered the coupon rate depending on the value of the collateral 6. How much total interest must the company pay every six months? a. $550,000 b. $275,000 c. $110,000 d. $55,000 SourceDocument.docx Page 1 of 4